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Politudes Commentary: Is the timing right to do something serious about inequality in North America?

We’ve heard lots about increasing inequality in North America and Europe, Solid research reports (such as OECD, Divided We Stand (2011)) have made it clear that not only are the rich getting richer, but for several decades, the poor and the middle classes have been losing ground. A Canadian Parliamentary Committee pointed out in Dec 2013 (see http://www.politudes.com February 2014) that in Canada during the past three decades, fully 60% of households have seen significant erosion of their market income. The Committee also noted that inequality is greater in the USA, and has also been increasing rapidly in several European countries, albeit often from a lower base level.

One of the explanations for increasing inequality is that for various reasons (globalization, technological revolution, tax and labour market policies, etc) the benefits of gradually increasing labour productivity in recent decades have not been shared with the workers who are now more productive. A study by the (Canadian) Centre for the Study of Living Standards shows the accumulating scope of the problem:

… median earnings of individuals working full time on a full- year basis barely increased between 1980 and 2005. Adjusting for inflation, annual earnings increased from $41,348 to $41,401 (in 2005 constant dollars), a mere $53 over 25 years. Over the same time period, labour productivity in Canada rose 37.4 per cent. If median real earnings had grown at the same rate as labour productivity, the median Canadian full-time full-year worker would have earned $56,826 in 2005, considerably more than the actual $41,401. …This divergence can be explained by four factors: measurement issues associated with wages, an increase in earnings inequality, a decline in labour’s terms of trade, and a decline in labour’s share of national income.

For more info: The Relationship between Labour Productivity and Real Wage Growth in Canada and OECD Countries CSLS Research Report No. 2008-8 Andrew Sharpe, Jean-François Arsenault, and Peter Harrison

In a similar vein, John Schmitt, Senior Economist at the Center for Economic and Policy Research in the USA (Issue Brief March 2012) has calculated that if the US federal minimum wage had tracked upward with productivity from its 1968 level, it would in 2012 have been $21.72 /hour instead of $7.25.

Of course we cannot know what scenarios would have emerged had wages risen at that pace. Inflation rates would have been different. More jobs may have been off-shored. Unemployment may have been much higher. But is a continuation of that trend inevitable? We know that income distribution trends change frequently in response to the state of the economy and to the impact of public policy.

In past decades we had a huge generation of men and women looking for work and it may have seemed like a bad job was better than no job. Our labour markets were “liberalized” by public policy. Minimum wages were kept low. Employers were permitted to hire part-time staff and avoid providing adequate health, disability or retirement benefits. Unions in the private sector were weakened in the face of global supply chains.

The overall result of these and myriad other factors was a devaluation of work relative to the output accomplished, combined with increasing inequality of earnings and wealth. This created social tensions as evidenced in the Occupy movements. The OECD points out that the economic crisis has worsened matters, and organized a forum to seek new approaches to “inclusive growth.”

…The crisis has drawn attention to the stark reality of growing inequality and the uneven distribution of burdens and rewards across society. http://www.oecd.org. OECD Forum April 2014
(www.oecd.org/inclusive growth)

In the description of the forum, they warn that a loss of faith in public institutions could undermine the political and economic functioning of societies.

Some (by no means all) political and institutional leaders are concerned. Yet so far the most dramatic proposal has been President Obama’s request for federal and state legislatures to implement a $10 minimum wage, and an increase in the Earned Income Tax Credit (EITC) for unattached individuals. The Canadian Parliamentary committee recommended that the government consider increasing the supplement for the working poor under the Working Income Tax Benefit (WITB) but their tone did not suggest anything radical. These proposals might keep the bottom from falling out from under the poorest workers, but will not reverse the weakening of life chances for half of the population.

People will say that the economic climate is not good for doing anything bold. Expanding health care costs and income transfers to the elderly are taking up increasing portions of tax revenues. There is fear that the future labour force will be too small to sustain the ageing baby boom generation. And no one wants to risk killing even low end jobs when the recovery is still fragile.

But these may not be the show-stoppers they are made out to be. Health costs related to ageing have often been overstated (www.politudes.com January and February 2014) and societies which are more advanced in their ageing cycle are performing quite well. In health care it is the increasing quality of diagnosis and intervention and the increasing number of pharmaceutical treatments coming on line that are driving the greatest cost increases. And if a society decides to consume more health care that is not necessarily a bad thing. As for pensions the retiring generation are often working part time, and have significant private income which is feeding back into the system. They also hold substantial wealth.

Taxation levels in North America are below prevailing levels in Europe. And many countries with higher tax burdens are performing well economically. Canada could increase its total tax revenue by 10% and still only be at the OECD average tax burden. The USA has much more room than that. So there is room to significantly improve the Earned Income Tax Credit and the Working Income Tax Benefit, which would provide effective work incentives and also serve to bring “under the table” work into the formal economy.

Leaders have been resistant to expanding these tax credits because each improvement not only helps existing beneficiaries, but also expands the number of eligible recipients, and phasing it out without creating “notches” or disincentives to increase earnings, does involve large expenditures.The balance between increased income redistribution through the tax system, and requirements for low-end employers to increase wages requires careful planning, but this is what finance departments are equipped to do if political direction is given.

As baby boomers retire, a generation which is smaller relative to the overall population, is looking for work. Normally this would improve employment opportunity and wages for jobseekers. However, Canada has been permitting employers to bring in temporary foreign workers in a wide range of occupations,. This, according to the CD Howe Institute (Commentary 407: Dominique Gross, Temporary Foreign Workers in Canada; Are They Really Filling Labour Shortages?) has had the effect of keeping unemployment rates artificially high. Therefore it is a wedge against increased bargaining power for workers.

To increase productivity and do something about inequality It might be better to stop importing low wage temporary workers and instead let market forces work. That should create pressure for higher wages, and for employers to improve productivity through labour-saving technology. Some low end jobs will disappear but the economy overall will be stronger. A substantial increase in minimum wages, phased in over time, will encourage this process and help to push up the bottom half of the wage structure. An increase in the WITB and EITC could extend this effect and improve individual and family incomes well up into the middle income range.

What about education? OECD figures demonstrate clearly that education is a vital factor in reducing unemployment, increasing productivity, and creating higher incomes. (OECD Education at a Glance, 2013). Completed vocational education is far more financially rewarding than secondary schooling (or less) only. Tertiary education is far better again. With fewer workers seeking marginal work and more jobs paying decent wages the incentives for training and education to become more efficient will be properly aligned. Education can be accelerated, and students will want to finish their education more quickly to begin earning. Governments can afford to make it easier for all youth to get a good education, as their investment will be returned in higher tax revenues.

As the economy emerges from the recession it will be more adaptive to these kinds of changes than at other times. The whole process will generate some inflation in the industries most affected, such as accommodation, food service and retail outlets. But we can stand a bit of inflation, and those industries can become more productive.

Will the perfect opportunity ever present itself to improve opportunity for the ordinary workers of North America? Unlikely. But perhaps the stars are aligning themselves well enough to make a courageous effort.